Debt Finance and Security Flashcards
What is a debt security?
IOUs issued by the company to an investor in return for cash at an agreed future date
What is an overdraft facility?
A contract between a business and its bank to allow the business to overdraw its current account.
A bank may charge interest on the overdraft or could call in the debt at any time they’d like.
What are the benefits and disadvantages of an overdraft facility?
+ flexible
+ few formalities needed to arrange
- repayment may be demanded at any point
- quite expensive interest rates
What are the benefits and disadvantages of a term loan?
+ greater certainty than other methods due to terms laid out in a contract;
- time and expense to negotiate;
- money cannot be re-borrowed once paid
What are the benefits and disadvantages of a revolving credit facility?
+ very flexible means of borrowing money;
+ possible to reduce the interest payable by reducing borrowings;
- expensive when negotiating and agreeing documentation
What are the main types of debt security for a company or LLP?
(i) Mortgages;
(ii) fixed charges;
(iii) floating charges
What is a mortgage in the context of a company? What type of property in this context is excluded from the definition?
Transfer of legal ownership from the mortgagor to the mortgagee (excluding land), title transferred back to mortgagor when the money is repaid.
What is a fixed charge?
A charge which is attached to a property and grants a chargor rights over the property.
Often taken over large assets, e.g. the company warehouse, the chargor cannot deal with the property without the authorisation of the chargee.
Can you create more than one fixed charge over the same asset?
Yes, but the payouts of the charges will rank in order of creation.
What is a floating charge?
A charge which doesn’t result in the chargee having control over the asset.
Secures a group of assets that are constantly changing, the LLP/Company can deal with the asset as they wish until the charge ‘crystallises’
What does it mean for a floating charge to crystallise and when will this happen?
Upon crystallisation the lendee can no longer deal with the assets - effectively turns into a fixed charge. This happens when:
(i) chargor goes into receivership;
(ii) chargor goes into liquidation;
(iii) chargor ceases to trade;
(iv) any other event specified in the charge document
What are the advantages and disadvantages of floating charges?
+ allows the chargor to deal with the assets on a day-to-day basis;
+ can attach to assets unsuited to fixed charges;
+ can attach to the whole business;
- a fixed charge will take priority over a floating charge over the same asset;
- less secure for a chargee, given the floating charge asset can be dealt with
When do you register a charge?
Within 21 days of the creation of the charge (starting with the day after the charge is created).
What happens if you don’t register a charge?
The charge has no legal effect against third parties
What is the priority rank of charges?
(1) A fixed charge or mortgage will take priority over a floating charge over the same asset;
(2) if there’s more than one registered fixed charge or mortgage, they have priority in order of creation, not registration;
(3) if there’s more than one registered floating charge, they have priority in order of their creation
